Victorian Auditor-General s Report May :26

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Victorian Auditor-General’s Report

May 2014

2013–14:26

V I C T O R I A

Victorian

Auditor-General

Shared Services in

Local Government

This report is printed on Monza Recycled paper. Monza Recycled is certified Carbon Neutral by The Carbon Reduction Institute (CRI) in accordance with the global Greenhouse Gas Protocol and ISO 14040 framework. TheLifecycle Analysis (LCA) for Monza Recycled is cradle to grave including Scopes 1, 2 and 3. It has FSC Mix Certification combined with 55% recycled content.

The Hon. Bruce Atkinson MLC The Hon. Christine Fyffe MP

President Speaker

Legislative Council Legislative Assembly

Parliament House Parliament House

Melbourne Melbourne

Dear Presiding Officers

Under the provisions of section 16AB of the Audit Act 1994, I transmit my report on the audit Shared Services in Local Government.

The audit assessed whether selected councils' shared service initiatives are soundly based and have appropriate governance arrangements, effective project management practices and effective monitoring, evaluation and reporting to demonstrate the achievement of intended objectives. It also examined the support and guidance provided to councils in developing, implementing and managing these initiatives. The report identified that initiatives are generally soundly based, with appropriate governance and effective project management arrangements. However, the majority of councils find it challenging to quantify the impact of shared services due to a lack of baseline data and other information. This is a significant weakness of current shared service activity in the state and makes it difficult to measure the full extent of both financial and non-financial benefits from shared services being realised by Victorian councils.

Councils should develop and implement effective monitoring, evaluation and reporting on shared services to clearly identify expected costs and benefits, supported by reliable baseline data and clear and measurable outcomes. It will be important that they receive support and guidance from Local Government Victoria to address this shortfall in management information.

Yours faithfully

John Doyle

Auditor-General

Contents

Auditor-General's comments ... vii

Audit summary ... ix

Conclusions ...x

Findings ... xi

Recommendations ... xv

Submissions and comments received ... xv

1. Background ... 1

1.1 Shared services ... 1

1.2 Legislation, sector support and guidance ... 4

1.3 Examples of shared service initiatives ... 6

1.4 Roles and responsibilities ... 7

1.5 Previous audits ... 8

1.6 Audit objective and scope ... 8

1.7 Audit method and cost ... 9

1.8 Structure of report ... 9

2. Shared service activity at councils... 11

2.1 Introduction ... 12

2.2 Conclusion ... 12

2.3 Shared services ... 12

2.4 Future directions and opportunities ... 24

3. Expected benefits and outcomes from shared services ... 25

3.1 Introduction ... 26

3.2 Conclusion ... 26

3.3 Outcomes of shared services ... 26

4. Support and guidance provided to councils ... 31

4.1 Introduction ... 32

4.2 Conclusion ... 32

4.3 Shared services programs ... 33

Auditor-General’s comments

Victoria’s 79 local councils play an important role in delivering a wide range of services to their local communities, as well as building and maintaining community assets and infrastructure, and enforcing various laws. As part of ensuring their long-term sustainability, councils should look for opportunities to reduce

expenditure or operate more efficiently—particularly as they face cost pressures and other challenges, such as renewal and replacement of assets and increases in service delivery costs.

As councils carry out similar functions and common activities, shared services are one way they can achieve greater efficiency in service delivery, improve service quality and deal with various challenges. Shared services involves councils working together and/or with other organisations to share costs and resources, and may include delivering external services to the community, such as libraries and waste collection, or providing back office functions, such as human resources and payroll, or the procurement of goods and services.

Surprisingly, I found that there is limited information available on the nature and extent of shared service activity by the Victorian local government sector. To address this gap, I undertook a statewide survey of local councils to establish baseline information. I was pleased that 58 of Victoria’s 79 councils participated in the survey—representing a 73 per cent response rate and providing a solid basis for understanding current and future shared service activity.

My survey found that most councils undertake some form of shared services—with the key reasons including to reduce costs, increase service quality and improve community outcomes. While most activity is related to procurement and the delivery of external services, the survey results suggest significant projected growth in new shared services for back office functions.

Given the anticipated growth in back office shared services, I have recommended that councils ensure future initiatives are soundly based, and that Local

Government Victoria (LGV) provides direction to councils by identifying back office functions most suitable for shared services, and potential cost savings and other benefits.

I have also recommended that LGV assist councils by investigating key challenges and barriers to implementing shared services and identifying strategies to address these to further encourage the use and successful implementation of shared services by local governments.

John Doyle

Audit team

Based on an examination of selected initiatives that the six audited councils are involved in, it was pleasing to find that initiatives were generally soundly based, have appropriate governance arrangements and effective project management practices. However, despite the significance of expected financial benefits from many shared service initiatives, the measurement of outcomes for initiatives is generally poor, and this is a significant weakness of current activity in the sector. Therefore, I have recommended that councils develop and implement effective processes for monitoring, evaluating and reporting outcomes to assess the extent to which these are being realised, and to drive continuous improvement. I have also recommended that LGV assists councils to improve in this area.

It is positive that LGV has provided a range of support and guidance to the sector to facilitate shared services and promote collaboration among councils. I have recommended that LGV continues to improve its program evaluation and information sharing, and develops new guidance materials to assist councils to develop their own initiatives.

It will also be important for LGV to consider the impact a potential shift to back office shared service activity might have on its existing and future policies and programs, and to target its support and guidance to reflect this potential change. Since data on shared service activity in the sector is currently not collected, it will be valuable for LGV to gather information on an ongoing basis to better understand trends and inform the development of policy, programs and guidance materials. In other jurisdictions, such as the United Kingdom, trend data about shared services in the local government sector is publicly available.

I am pleased that LGV and the audited councils have accepted the recommendations I have made, and I am confident that adopting these will maximise opportunities that exist to benefit from shared services in the future. I would like to thank LGV and the Colac Otway, Hepburn, Hume, Hobsons Bay, Latrobe and Stonnington councils for their assistance and cooperation during this audit. I would also like to acknowledge the Municipal Association of Victoria’s assistance and extend a special thank you to the councils who participated in my survey.

John Doyle Auditor-General 28 May 2014

Audit summary

Victoria’s 79 local councils deliver a wide range of services to their communities including child and family day care services, Meals on Wheels, waste collection, planning, and recreational services. Councils also build and maintain community assets and infrastructure—including roads, footpaths and drains—and enforce various laws.

As councils share many common statutory responsibilities and carry out similar functions and activities, there are opportunities to work together to jointly deliver services and share costs and resources. Shared services provide an opportunity to efficiently use resources and/or improve service offerings, and shared service arrangements in various forms have been implemented across government and the private sector in Victoria and other jurisdictions.

Garbage collection, photograph courtesy of Stonnington City Council.

In this audit, we have defined shared services as where two or more local councils jointly provide:

x external services—services that councils provide to the local community, such

as Meals on Wheels, waste collection and community and library services

x back office functions—functions that support external services, such as

information technology, finance, legal, payroll, and human resources

The audit assessed whether councils' shared service initiatives:

x are soundly based and include identification of the expected costs and benefits

x have appropriate governance arrangements

x have effective project management practices

x have effective monitoring, evaluation and reporting, which demonstrate the achievement of intended objectives.

It also examined whether councils have been provided with appropriate support and guidance by Local Government Victoria (LGV), in partnership with the sector.

Conclusions

Most Victorian councils undertake some form of shared services, although their use is evolving and relatively immature. Existing initiatives relate primarily to procurement or external services, such as library services, waste management and aged care. While there is limited growth expected in external initiatives, there is likely to be continued growth in shared procurement and in new shared services for back office functions, such as information and communications technology, payroll and human resources. This provides a significant opportunity for the sector to realise cost savings and other benefits.

Implementing shared services has been a key aspect of councils’ response to dealing with cost pressures and other challenges. Reasons for pursuing shared services were related to reducing costs, increasing service quality and providing better community outcomes. Despite cost savings being a key driver for shared services, councils are generally not able to demonstrate the achievement of intended outcomes. A lack of baseline data and other information makes it difficult to quantify the full extent of both financial and non-financial benefits from shared services being realised by Victorian councils, and there is significant scope for improvement in monitoring, evaluation and reporting.

Shared service initiatives vary in size, financial investment and complexity. The extent of work underpinning initiatives prior to their implementation also varies, with larger initiatives appropriately having had feasibility studies undertaken and business plans developed prior to their implementation, compared to less formal and detailed work for smaller initiatives. There are a range of governance arrangements in place for shared service initiatives, and these are generally appropriate, with the most common being boards or a lead council or agency. Initiatives examined had a designated project manager to plan and implement initiatives.

LGV provides a range of support and guidance to the sector, primarily in relation to shared procurement. This includes providing grants to councils and developing and disseminating guidance and other resources. These positive initiatives have promoted collaboration among councils and demonstrated the benefits of shared services in several areas.

Audit summary

LGV has the opportunity to build on its existing work to assist the sector to more fully realise the benefits of shared services. It should consider how the expected growth in shared services for back office functions might impact on its future policies and programs and the support and guidance required by the local government sector. There are also a range of challenges and barriers to councils undertaking shared services which LGV should investigate, as well as encouraging collaboration and knowledge sharing. LGV should continue to improve the evaluation of its programs and the collection and sharing of information.

Findings

Involvement in shared services

Ninety-one per cent of the 58 surveyed councils are currently involved in shared service initiatives, and 64 per cent reported they were either considering, or engaging in negotiations towards, a total of 86 future shared service initiatives.

The number of initiatives in which individual councils are currently engaged varies widely. Some councils are participating in more than 20 or 30 initiatives, with the largest reported number being 42, and an average of seven initiatives across councils. Current and proposed shared services cover a wide range of service areas.

Sixty-two per cent of current initiatives are externally focused services delivered to the community, such as library services, aged care services and waste collection. Over 25 per cent of current initiatives relate to shared procurement, which has been shown to result in significant cost savings for councils, and the rest are related to back office functions.

The survey results show that shared service activity in relation to back office functions is projected to significantly increase, while the growth of shared services in some external service delivery areas—for example library services, aged care and waste collection—is slowing. However, some further growth is expected in the external service delivery areas of disability, children and families, recreation, and health. There may also be expansion into largely new areas of activity, such as animal management, construction and planning.

Councils report that implementing shared services has been a key aspect of their response to cost pressures and other challenges. While the main reasons councils gave for pursuing shared services were related to reducing costs, other reasons related to improving service quality and achieving better community outcomes, and these were rated as almost as important. Other important factors cited were the sharing of skills, expertise and best practice, and the enhancement of strategic partnerships with partners.

Management of shared service initiatives

It is important that shared service initiatives are soundly based and have appropriate governance arrangements, effective project management and robust methods of measuring outcomes.

The extent of work underpinning initiatives prior to their implementation is generally appropriate to their size and financial investment. Larger initiatives have had feasibility studies undertaken and business plans developed prior to their implementation, compared to generally less formal and detailed work for smaller initiatives.

Initiatives we reviewed for this audit were planned and implemented by a designated project manager, and these arrangements were generally considered to be effective by councils involved. For a smaller initiative, a council officer may take on this role, a larger initiative may have a business manager, and initiatives led by LGV are generally managed either directly by LGV, a private contractor or the Municipal Association of Victoria.

A range of governance arrangements are in place for shared service initiatives, which are generally appropriate to the scale and complexity of the initiatives. The majority are formal arrangements. These include complex multi-level structures overseen by boards, simpler committee structures, or the existence of a lead council or agency. The range of management arrangements reflects the varied nature of initiatives, with some involving the formation of companies and others a simple memorandum of understanding or the more straightforward process of undertaking shared procurement.

Challenges of implementing shared services

There are a number of common challenges and reasons for initiatives stalling that need to be overcome for shared services to be implemented.

Councils reported that the most significant challenge of engaging in shared service activity is a perceived loss of autonomy and local control. Other key challenges were a lack of clarity about the benefits resulting from an initiative and concern about the costs of establishing and maintaining an initiative.

Key strategies surveyed councils reported they had used to address challenges included:

x cooperation, trust and accountability between partners

x effective and regular communication between all partners

x persistence, commitment and enthusiasm

Audit summary

Success factors in the delivery of initiatives

There are a number of factors involved in the successful delivery of shared service initiatives. Surveyed councils indicated that support of the chief executive officer, senior staff, and staff implementing the initiative is important to the success of shared services. A shared commitment and alignment of decision-making by all partners is also very important.

Despite the audit's finding that many councils were unable to quantify either expected or actual benefits, clarity about expected benefits was viewed as moderately important.

Outcomes of shared services

The most commonly identified approaches to quantifying or measuring the resulting financial and non-financial benefits of implementation were evaluation or review, cost analysis and satisfaction survey.

It is concerning that for around a quarter of initiatives, surveyed councils reported they did not know how benefits were to be measured, and for 5 per cent of initiatives, councils stated that benefits had yet to be measured or quantified.

Councils surveyed were also asked to quantify the expected cost savings, and the cost savings achieved so far, for each initiative. Even though most councils identified cost savings as an expected benefit for most of their initiatives, they often could not quantify the expected cost saving, or the cost saving actually delivered. They were unable to set a benchmark for delivery, or measure whether this benchmark had been met. Councils also found it difficult to demonstrate the achievement of non-financial benefits from shared services, such as improved quality of Meals on Wheels or library services. For example, while audited councils surveyed users and found they were satisfied with the quality of services, surveys were not undertaken until after initiatives had started, and therefore there was no baseline data with which to compare the results.

Support and guidance

Providing councils with support and guidance to develop shared services is important to drive the take-up of shared services, share knowledge and better practices and realise the potential benefits across the sector.

LGV provides a range of support and guidance to the sector to encourage greater use of shared service initiatives, including delivering programs that provide grant funding for councils to implement shared service initiatives, and developing and disseminating guidance and resources. These positive initiatives have promoted collaboration among councils and demonstrated the benefits of shared services in several areas,

particularly procurement.

Evaluations of LGV's more recent programs have improved, and there are opportunities for LGV to expand on the information about these evaluations that it provides on its website to enhance information sharing with the sector. Evaluations were not undertaken for earlier shared service projects, and therefore the opportunity to identify lessons to inform future programs and the sector has been lost.

Data on shared service activity in the sector is currently not collected to assess trends, demonstrate the costs and benefits of shared services, assist in informing policy and program development, and target future activities and the development of appropriate support and guidance materials. LGV should continue to focus its work on shared procurement activities. It should also consider how the expected growth in, and change in direction of, shared service activity for back office functions might impact its future policies and programs.

Future directions and opportunities

A significant number of councils report they are currently planning, negotiating or considering future shared service initiatives, suggesting there is considerable

momentum towards the expansion of shared service activity, particularly in back office functions and procurement.

Given the anticipated growth in back office shared services, LGV should provide direction by identifying back office functions most suitable for shared services and potential cost savings and other benefits for these initiatives. It should also investigate key challenges of establishing and implementing shared services, and identify strategies that can be used to address these to further encourage the use and successful implementation of shared services.

Before embarking on new initiatives, councils should ensure they are soundly based, including clearly identifying expected costs and benefits. Councils should also develop and implement effective monitoring, evaluation and reporting on shared services, including demonstrating the achievement of expected costs and benefits.

Audit summary

Recommendations

Number Recommendation Page

That councils:

1. ensure future initiatives are soundly based, including clearly identifying expected benefits and costs and how they will be measured

24 4. develop and implement comprehensive monitoring, evaluation and

reporting on shared services, supported by reliable baseline data and clear and measurable outcomes.

30 That the Department of Transport, Planning and Local Infrastructure:

2. identifies back office functions most suitable for shared services and the potential cost savings and other benefits that could result from these initiatives

24 3. investigates key challenges to implementing shared services and

identifies strategies that can be used to address these 24 5. assists councils to improve their monitoring, evaluation and

reporting of financial and non-financial benefits of shared services 30 6. continues to improve the evaluation of its shared service programs

to gain knowledge to share with the sector and inform the development of future programs

44 7. develops better practice guidance and templates to assist councils

to plan, implement and manage their own shared service initiatives, including with a focus on likely new areas of shared service activity, such as back office functions

44

8. gathers data on existing shared services in the sector to assess trends, inform the sector and guide the development of future programs, support and guidance

44 9 reviews the scope for greater sharing of back office functions,

including identifying functions most appropriate for shared services, potential cost savings and other benefits, and key barriers and risks.

44

Submissions and comments received

In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report was provided to the Department of Transport, Planning and Local Infrastructure and to the following six councils, with a request for submissions or comments:

x Colac Otway Shire Council

x Hepburn Shire Council

x Hobsons Bay City Council

x Hume City Council

x Latrobe City Council

x Stonnington City Council.

Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments are included in Appendix A.

1

Background

1.1

_{Shared services}

1.1.1

_{Victoria's councils}

Victoria’s 79 local councils deliver a wide range of services to their communities including child and family day care services, Meals on Wheels, waste collection, planning and recreational services. Councils also build and maintain community assets and infrastructure—such as roads, footpaths and drains—and enforce various laws. As councils share many common statutory responsibilities and carry out similar functions and activities, there are opportunities for them to work together to jointly deliver services and share costs and resources.

1.1.2

_{Shared services defined}

Shared services provide an opportunity to use resources efficiently and to realise other benefits, such as improved service quality. Various forms of shared service

arrangements have been implemented across government and the private sector in Victoria and other jurisdictions, and these have often been driven by efficiency and reform programs.

Shared services are one way that councils can potentially achieve greater efficiency in the delivery of services to the community. Shared services are defined as where two or more local councils jointly provide:

x external services—services that councils provide to the local community, such

as Meals on Wheels, waste collection and landfill operations, community and library services

x back office functions—functions that support external services, such as

information and communications technology (ICT), finance, legal, payroll, human resources, internal audit and asset management

x procurement—purchase of goods and services.

While procurement is a type of back office function, it is categorised separately here since the processes involved in sharing procurement tend to be much simpler

compared to other shared service arrangements. Procurement activities can also often be of a short-term nature, although there can be ongoing arrangements.

Shared services may also include one or more councils partnering with other organisations outside of local government for the delivery of specific services.

1.1.3

_{Types of shared services}

While there is potential to share almost all services, some are better suited to a shared arrangement. Implementations of shared services across public and private sectors globally have focused more on back office functions, which are often transactional in nature. These include procurement, finance and ICT. The reason for the focus on these services is that they involve relatively less tailoring or customisation, which means the shared service arrangements can be more streamlined, less costly and comparatively faster to implement. However, where ICT shared services have involved high levels of customisation, the sharing of services has had the opposite effect to what was intended.

Shared services literature indicates that targeting back office or transactional services, where there is mutual benefit, provides opportunities for more efficient use of

resources and potential for economies of scale. Needs-driven shared service arrangements, as opposed to a mandated approach, provide some flexibility in the design or model of shared service arrangements. Meaningful and readily available data in relation to the local government sector in the United Kingdom has enhanced the ability of local government to identify service areas where shared arrangements would offer benefits.

1.1.4

_{Shared services models}

No single model for shared services works better than others in all contexts. The design of shared service models has been based on the intended aims, the

preferences of the parties involved and the existing legislative requirements. In some instances, legislative amendments have been sought to accommodate existing restrictions or meet desired reform structures. A Productivity Commission review of local government coordination and consolidation in Australia identified the following categories of approaches to local government coordination:

x _{Joint activities between local governments—these include resource sharing,} joint projects and mutual recognition.

x _{Regional organisations of councils (ROCs) and other coordinating bodies}

of local government—ROCs are voluntary ‘partnerships between groups of

local government entities that agree to collaborate on matters of common interest.’

x _{Joint local government entities—joint local government entities can be created} to undertake the legislative responsibilities of individual local governments. These entities differ from other groups of local governments such as ROCs and other regional groupings in that legislation plays an essential role in their

establishment, objectives and governance, and these entities are delegated legislative responsibilities by their constituent local governments. They are usually created to provide services and manage facilities involving waste management, water, vermin control or land development.

More broadly, other models of shared services have been based on clustering or centralisation of designated shared services.

Background

1.1.5

_{Benefits of shared services}

Councils may consider adopting shared services for a variety of reasons. While increasing efficiency is usually an objective, cost reduction may not always be the key driver for councils. Other reasons may include improving the quality of service delivery, gaining access to skilled resources and/or needing to meet new statutory obligations. The benefits of shared services are mostly resource driven and centred on efficiency. A benefit of gaining efficiencies in back office functions is the ability to redeploy staff from the back office to the delivery of external services to the community. Benefits have been identified from the implementation of shared services in the public sector in other jurisdictions. For example, the National Audit Office in the United Kingdom found that while savings targets had not always been met, there were benefits through improved efficiency. These included:

x more systematic collection of management information, providing the opportunity to identify scope for further service improvements and financial savings

x moves towards paperless transactional processing

x improved processing times

x procurement savings.

Where savings or efficiency targets were not met, the United Kingdom National Audit Office found the intended benefits and estimated savings to be overly optimistic. In order to determine if shared service arrangements result in benefits, baseline data also needs to be available. Assessments of shared service initiatives have shown this to be an area of weakness.

1.1.6

_{Challenges and success factors}

There are a number of common challenges and success factors in establishing shared service initiatives that have been identified in shared services literature. These are described in Figure 1A.

Figure 1A

Common challenges and success factors

Challenges:

x loss of autonomy or control and the threat of losing local staff x reluctance or a lack of resources and funding to investigate options x complexity of the process and uncertainty around the benefits

x gaining timely commitment of partner councils and aligning council decision-making. Success factors:

x leadership and commitment at the senior level x passionate advocates within each council x a phased approach to implementation

x strong strategic direction supported by a business plan x effective project management.

1.2

_{Legislation, sector support and guidance}

Local Government Act

The Local Government Act 1989 sets out a range of legislative provisions that could apply to entering into shared service arrangements, as shown in Figure 1B.

Figure 1B

Legislative provisions that could apply to shared services Sections of the Local Government Act 1989—summarised

Section 3C— Objectives of a council

A council is to endeavour to achieve the best outcomes for the local community, having regard to the long-term and cumulative effects of decisions.

In seeking to achieve its primary objective a council must have regard to a number of matters, including efficient and effective use of resources in accordance with section 208B—Best Value Principles, promotion of business and employment opportunities, and accessible and equitable services and facilities.

Section 3D—The

role of a council The role of a council includes (among other things) providing leadership, responsible and accountable management of resources, and acting as a responsible partner in government by taking into account the needs of other communities.

Section 3E— Functions of a council

A council may perform its functions inside and outside its municipal district. Section 186—

Restriction on power to enter into

contracts

Usual tendering provisions do not apply if the contract is entered into with a council acting as the agent for a group of councils or in accordance with arrangements approved by the minister.

Wherever practical, a council must give preference to contracts for the purchase of goods, machinery or material manufactured or produced in Australia or New Zealand.

Section 193— Entrepreneurial powers

A council may:

• form and operate a corporation, trust, partnership or other body • become a member of a company limited by guarantee

• acquire and dispose of shares or other securities.

A council must assess the total risk exposure of forming or operating a company. If the risk exposure is greater than $500 000, or 5 per cent of the council’s revenue from rates and charges, the approval of the minister is required.

If the risk exposure exceeds $5 million, the council must consider a risk assessment report and obtain the approval of the minister and the Treasurer Section 203—

Transport plan A council may prepare a transport plan jointly with one or more councils. Section 208B—Best

Value Principles A council must comply with Best Value Principles, which are that: _{• council services must meet quality and cost standards, be responsive to} the needs of the community and be accessible

• a council must achieve continuous improvement with service provision, develop a program of regular consultation with its community and report on its achievements.

Source: Victorian Auditor-General's Office, based on information from Somerville, D. and Gibbs, M. (2012) Legal and Governance Models for Shared Services in Local Government, Australian Centre of Excellence for

Background

Sector support and guidance

Sector support and guidance is available to councils from a range of sources. This includes grant programs, better practice guides and collaborative networks. These programs and initiatives have been developed by Local Government Victoria (LGV) and the Municipal Association of Victoria (MAV). Key programs and initiatives are set out in Figure 1C.

Figure 1C

Sector support and guidance material

Program/Initiative Type and Description Sponsor

Councils Reforming Business (CRB) program

A program that ran from 2007 to 2011 aimed at supporting councils to improve services and reduce costs, and reducing red tape for businesses working with councils. One of the CRB’s five key priority areas was to encourage greater use of shared services.

LGV and MAV

Local Government Reform Fund (LGRF) program

A program, which ran from 2010 to 2012 to build on the CRB program, that aimed to assist councils to improve their financial and resource management capabilities and business practices. It provided opportunities for council collaboration.

LGV

Local Government Reform Strategy (LGRS)

A strategy, launched in 2012 to continue the reform program that aims to deliver a range of initiatives, including collaboration on procurement.

LGV Victorian Local

Government Best Practice Procurement Guidelines

Guidelines that include some advice on initiating

collaborative procurement projects. LGV MAV Procurement The MAV Procurement unit facilitates group

purchasing for councils. MAV

Procurement eHub A centralised procurement resource facility developed under the CRB program. It includes standardised documentation, templates, training opportunities, case studies, links and discussion boards.

LGV

Regional Procurement Excellence Networks (RPEN)

Nine RPENs operate across the state. They have a representative from every council and work together to establish collaborative opportunities and further shared service initiatives in procurement.

LGV

Source: Victorian Auditor-General's Office.

Previous work by MAV identified shared services as a priority area for local government under its Future of Local Government project. MAV worked in

collaboration with mayors and council chief executive officers to identify key areas of local government business that would benefit from shared services. Shared service projects identified were funded under LGV's CRB program. MAV has also initiated a number of shared service initiatives in the sector, including the Swift Library

1.3

_{Examples of shared service initiatives}

Recent Australian and international examples of councils working together and with other organisations are shown in Figure 1D.

Figure 1D

Examples of shared services

Community Chef—Victoria

In 2004, 15 councils investigated the feasibility of constructing and operating a food manufacturing facility for their Meals on Wheels service. Previously, councils had

individually contracted the supply of meals through tenders, often to commercial providers, or operated their own kitchens. The main drivers of this initiative were cost containment, improving meal quality and supply certainty and reduction of risk to councils previously supplying meals from their own kitchens. The production of meals commenced in 2010. Twenty-one councils are involved as joint venture partners and shareholders in one or both of two companies. The facility, located in Hobsons Bay, is not yet running at full capacity and is seeking further business to support sustainability in the long term. It recently expanded its supply of meals to include five hospitals and three aged care facilities. Swift Library Consortium (Swift)—Victoria

In 2004, four regional library corporations developed a memorandum of understanding to work towards a shared integrated library management system. The initiative is jointly sponsored by the MAV and the Public Libraries Victoria Network, formerly Viclink. It has been operating since March 2007 and has grown to 26 public library services with

150 branches, involving 40 Victorian and six New South Wales councils. The aim of Swift is to improve the efficiency and quality of library services and provide library users with resources and collections they may not otherwise be able to access, as well as the cost-effective implementation of innovative technology. Swift has a combined collection of around three million items, servicing 800 000 library users. It has resulted in cost savings for participating councils and other benefits in comparison to operating a stand-alone library. Eastern Health Authority—South Australia

This is a regional subsidiary that comprises five councils. The authority provides environmental health services, such as immunisation and food safety, on behalf of its member councils. It employs around 17 staff and buys in corporate services from one or more of its constituent councils without having the administrative costs of running these services itself. It has demonstrated cost and quality advantages in providing joined up health service activities. For example, bulk purchasing for immunisation drugs has reduced costs compared to councils delivering it as a stand-alone service.

Wellington, Blayney, Cabonne (WBC) Strategic Alliance—New South Wales WBC is a voluntary cooperative alliance of four councils and Central Tablelands Water. It provides benefits to member councils, including savings mostly derived from procurement activities. Purchases include fleet, information technology (IT) software, fuel, audit services and heavy plant.

Local Government Shared Services—United Kingdom

In 2010, a partnership comprising six councils, the East of England Local Government Association, and a number of schools and academies was established. It delivers over a dozen services, including:

• professional services

• front-line services, such as social care financial assessments • back office functions, including payroll, IT and finance.

The partnership is expanding its service delivery to third parties and has begun providing services to two other councils. The partnership has achieved both financial and

non-financial benefits.

Source: Victorian Auditor-General’s Office based on publicly available information, from the

Background

Community Chef initiative, photograph courtesy of Hobsons Bay City Council.

1.4

_{Roles and responsibilities}

1.4.1

_Councils

Local government is recognised under the Victorian Constitution Act 1975 as a discrete and essential tier of government consisting of democratically elected councils having the functions and powers necessary to ensure peace, order and good governance of each municipal district. Victoria has 79 local councils.

1.4.2

_{Local Government Victoria}

LGV is a division of the Department of Transport, Planning and Local Infrastructure. It supports and advises the Minister for Local Government in administering the Local

Government Act 1989. Part of its role is to provide advice and support to councils in

relation to their roles and responsibilities under the Act, including such matters as governance, elections and resource management.

1.4.3

_{Municipal Association of Victoria}

MAV is the peak body for Victoria's 79 councils and is governed by the Municipal

Association Act 1907. The role of MAV includes advocating for local government

interests, building the capacity of councils and providing guidance and support in a range of areas, including group procurement. MAV's latest strategic plan includes an objective of pursuing reforms that achieve whole-of-sector productivity gains. An action item against this is to 'improve regional collaboration through shared service

1.5

_{Previous audits}

1.5.1

_{Organisational Sustainability of Small Councils,}

June 2013

This audit found that shared service initiatives identified at the councils was limited to the sharing of a component of an activity or service rather than the full delivery of a service. Specific shared service arrangements the councils were participating in included:

x _{back office functions—business improvement, ICT, payroll and procurement} x _{external services—aged care and disability, building services, child/family/youth}

services, environment, emergency management, health, libraries, roads and transport.

With some exceptions, such as libraries, these arrangements were not mature or undertaken on a large scale. As no evaluation of these arrangements had occurred, the extent to which savings and efficiencies were achieved was unknown. Therefore, it was not clear that sharing these services was improving the sustainability of these councils.

1.6

_{Audit objective and scope}

The audit objective was to assess the effectiveness, efficiency and economy of shared service initiatives undertaken by local councils. The audit also sought to identify common barriers to the take-up and implementation of shared services by councils and how effectively these have been addressed, and to better understand the success factors and reasons for initiatives stalling. It also assessed support and guidance provided by LGV.

The audit focused on LGV and six local councils:

x Colac Otway Shire Council

x Hepburn Shire Council

x Hobsons Bay City Council

x Hume City Council

x Latrobe City Council

x Stonnington City Council.

The audit assessed whether selected councils' shared service initiatives: x were soundly based and included identification of the expected costs and

benefits

x had appropriate governance arrangements

x had effective project management practices in place to plan and implement initiatives

x had effective monitoring, evaluation and reporting, which demonstrated the achievement of intended objectives.

Background

It also examined whether councils have been provided with appropriate support and guidance by LGV, in partnership with the local government sector, in developing, implementing and managing shared service initiatives.

A survey of Victoria’s 79 councils was undertaken to establish baseline information on the nature and extent of shared services in the sector. In total, 58 of the 79 councils responded, representing a response rate of 73 per cent. This provides a sound basis for understanding the extent and nature of engagement with shared services in local government across Victoria.

A small number of initiatives were selected for further examination, based primarily on information from the audited councils involved.

Library service, photograph courtesy of Latrobe City Council.

1.7

_{Audit method and cost}

The audit was conducted in accordance with section 15 of the Audit Act 1994 and Australian Auditing and Assurance Standards. Pursuant to section 20(3) of the

Audit Act 1994, any persons named in this report are not the subject of adverse

comment or opinion.

The cost of the audit was $420 000.

1.8

_{Structure of report}

The report is structured as follows:

x Part 2 discusses shared service activity at local councils.

x Part 3 discusses the expected benefits and outcomes from shared services. x Part 4 discusses support and guidance provided to local councils by Local

2

Shared service activity at

councils

At a glance

Background

Shared services are one way that councils can potentially achieve greater efficiency in the delivery of services and deal with cost pressures and other challenges. Initiatives should be soundly based and have appropriate governance arrangements and effective project management. An understanding of current and likely future shared services can provide insights and knowledge to inform future activities and programs.

Conclusion

Most Victorian councils undertake some form of shared services. Existing initiatives are primarily related to procurement or external services, such as libraries, waste

management and aged care. Continued growth is expected in shared procurement and in relation to back office functions, such as human resources, information systems and finance. Initiatives generally have appropriate governance arrangements and effective project management practices. There are a number of common challenges to the take-up and implementation of initiatives. Reasons for pursuing shared services include cost reduction and increased service quality.

Findings

• Ninety-one per cent of the 58 councils surveyed are involved in shared services. • Sixty-four per cent of the councils are planning, negotiating or considering future

initiatives.

• Governance arrangements were appropriate in relation to the scale and complexity of initiatives.

• Initiatives that we reviewed for this audit had a designated project manager for planning and implementation.

Recommendations

That councils:

• ensure future initiatives are soundly based, including clearly identifying expected benefits and costs and how they will be measured.

That the Department of Transport, Planning and Local Infrastructure: • identifies back office functions most suitable for shared services

2.1

_Introduction

Shared services are one way that councils can potentially achieve greater efficiency in the delivery of services to the community and deal with cost pressures and other challenges. It is important that shared service initiatives are soundly based and have appropriate governance and project management arrangements.

Limited information on the nature and extent of shared services in the sector prompted the audit team to undertake a survey of the sector to capture the extent of participation in shared services. VAGO also obtained information from audited councils through the examination of selected initiatives.

2.2

_Conclusion

Most Victorian councils undertake some form of shared services, although the use of shared services is evolving and relatively immature. Existing initiatives are primarily related to procurement or external services, such as library services, waste

management and aged care.

While there is limited growth expected in external initiatives, there is likely to be continued growth in shared procurement and new shared services for back office functions, such as information management and information communications technology (ICT), payroll and human resources (HR). This indicates a significant shift in the use of shared services for the local government sector and is in contrast to the literature, which suggests that the first services usually subject to shared service arrangements are back office functions.

Local Government Victoria (LGV) should investigate the range of challenges and barriers councils face when undertaking shared services and encourage collaboration and knowledge-sharing.

The extent of work that underpins initiatives prior to their implementation varies and is generally appropriate, with larger initiatives having had feasibility studies undertaken and business plans developed prior to their implementation, compared to less formal and detailed work for smaller initiatives.

Governance arrangements are generally appropriate, with the most common being boards and a lead council or agency. Initiatives examined had a designated project manager to plan and implement initiatives, and these arrangements were viewed as effective by participating councils.

2.3

_{Shared services}

2.3.1

_{Involvement in shared services}

Ninety-one per cent of the 58 surveyed councils are currently involved in shared service initiatives, and 64 per cent reported they were either considering, or engaging in negotiations towards, a total of 86 future shared service initiatives.

Shared service activity at councils

The number of initiatives in which individual councils are currently involved varies widely. Some councils are participating in more than 20 or 30 initiatives, with the largest reported number being 42 and the average across councils being seven initiatives.

There was no evident relationship between the amount of shared services activity and either council size or location. Therefore, the key issues that determine whether or not a council engages in this activity are likely to be more local, and may relate more to the needs and the style, culture and leadership of the organisation.

Current and proposed future shared services cover a wide range of service areas, as shown in Figure 2A.

Figure 2A

Current and proposed future shared service areas of activity—survey responses

Source: Victorian Auditor-General's Office.

54 35 29 23 18 17 15 13 13 10 8 7 7 6 5 5 5 4 3 3 3 2 2 2 2 1 1 1 1 16 4 5 3 14 17 4 4 10 14 6 1 2 4 2 16 1 14 1 2 3 4 4 3 0 10 20 30 40 50 60 70 Procurement Library Aged care Waste Asset management ICT Disability Children and families Financial Human resources Health Research Other Recreation Emergency Environmental Utilities Legal Customer services Cleaning Travel Payroll Meals on Wheels Street lighting Building inspection Roads Animal management Construction Don't know Planning Internal audit Number

Current focus of shared services

Sixty-two per cent of initiatives are externally focused services to the community, such as library services, aged care services and waste collection, with over 25 per cent of current initiatives being procurement related, and the rest related to back office functions. Approximately a third of the shared procurement initiatives were ongoing, with a little over one in 10 being one-off procurement activities.

Current shared service activity is in contrast to the literature, which suggests that the first services that are usually subject to shared service arrangements are back office functions. The lack of activity in this area may be due to a range of reasons, such as perceived loss of autonomy and local control. This factor was identified as a major barrier to shared services and is discussed further later in this Part.

Most initiatives were partnerships with other Victorian councils—81 per cent. Other common partnerships included:

x _{Victorian Government departments—15 per cent} x _{Municipal Association of Victoria (MAV)—10 per cent}

x non-governmental organisations and non-profit organisations outside the public sector—10 per cent.

Future shared service activity

The survey results indicate future expected growth in shared services is likely to focus more on back office functions, such as information management and ICT, finance, HR and legal and payroll functions, along with a continued increase in shared

procurement. This reflects the activity at the audited councils, with most initiatives being externally focused and procurement related, and two of the audited councils either considering or engaging in negotiation towards back office shared services with neighbouring councils. Potential shared functions at these councils include accounts payable, payroll, rates, ICT, HR, local laws, compliance and disaster recovery. Another reason for lack of shared service activity in back office functions is likely to be that existing external shared service arrangements have largely been needs driven, and related to external service delivery, or the result of initiatives led by third parties, such as MAV or LGV.

While sharing of back office functions is projected to increase, the growth of shared services in some external service delivery areas—for example, library services, aged care and waste collection—is expected to slow down. However, based on the survey results some growth is expected in the service delivery areas of disability, children and families, recreation and health. There may also be expansion into largely new areas of activity, such as animal management, construction and planning.

Figure 2B sets out a case study of two rural councils sharing a back office function. While this initiative was not subject to this audit, as an example it highlights that councils are undertaking these types of arrangements and expect significant potential benefits.

Shared service activity at councils

Figure 2B

Case study: Sharing of rates function—Indigo and Towong shire councils

When the rates officer at Indigo Shire Council resigned, the council sought an alternative solution and negotiated a shared service arrangement with a neighbouring council, Towong. Towong is responsible for providing core property and rates services, including rates notices, technical rates-related queries and the recovery of unpaid rates. Indigo deals with initial enquiries but can decide to forward those that are more complex to Towong.

Costs of delivering the service are shared on a pro-rata basis. While this is a relatively new arrangement, reported benefits identified include:

x reduced operational risk through increasing the number of rates staff across the service x expanded customer service coverage across the week for the rates department

x increased capacity to develop service improvements, including the planned implementation of electronic rates notices in 2015

x reduced costs for Indigo from not having to recruit and train a new staff member. The expected cost savings in relation to producing rates notices are 25 per cent, with the forecast price reduction being a drop from $13.12 to $9.98 per assessment. Staff costs are expected to reduce further as staff increase their skills and experience and become more efficient.

Source: Victorian Auditor-General's Office, based on information provided by Towong Shire Council.

Road repairs, photograph courtesy of Hepburn Shire Council.

Costs and potential for back office shared services

We asked audited councils to provide the costs associated with back office functions and to identify which of their activities have shared service potential. Due to different organisational structures, not all audited councils have the same back office functions, and the size of councils and number of staff varies between councils. However, there are common functions across all audited councils. Figure 2C highlights the cost of back office functions and whether they are considered suitable for shared service

Figure 2C

Common back office functions at audited councils Back office functions

Number of full-time

equivalent staff Total cost ($)

Considered suitable for shared services

Council corporate support—risk and records management, councillor and mayor support, governance, insurance

62 9 929 962 2

Financial services—accounts, accounting, valuations and procurement

89 9 818 963 9

Service and contact centre—in

person and phone based 85 6 920 142 2

Information services—service desk, projects, network, business analysis, Geographic Information System (GIS)

66 6 552 169 9

Marketing and communications— events and festivals, media communications

40 5 004 511 2

Human resources—training, development, WorkCover and occupational health and safety

40 4 641 943 9

Capital works planning 16 1 634 293 2

Payroll 14 1 259 051 9

Planning—council and service

planning 9.5 628 848 2

Contract management 7.3 562 837 2

Research 3.6 531 466 2

Total 47 484 185

Source: Victorian Auditor-General’s Office based on information provided by audited councils.

There were varied views across the audited councils on which back office functions were suitable for shared services. One audited council raised concerns about loss of control of critical services and the management of priorities. Another council stated that its main concern with shared back office functions would be maintaining the council’s quality of services. However, in general most councils expressed the view that the following back office functions would be suitable for shared service arrangements:

x payroll

x some accounting functions

x information services

x valuations

x human resources.

Some back office functions are considered unsuitable for shared service

arrangements, including event and festival organisation, in-person service centres and council planning and capital planning, as they require local knowledge of communities, which presents a barrier to the implementation of shared service arrangements.

Shared service activity at councils

2.3.2

_{Drivers of adoption of shared services}

Cost pressures and other challenges facing local government create an imperative for councils to identify opportunities to reduce expenditure and/or improve service delivery to ensure their long-term sustainability.

Surveyed councils indicated that the most common cost pressures and challenges were:

x increases in the cost of service delivery

x replacement or renewal of assets

x cost shifting by other levels of government

x population growth—a key issue for a minority of councils but of high importance when cited

x community expectations

x limited opportunities to raise revenue

x declining government grants

x the defined benefit superannuation funding call-in.

Councils identified a range of strategies that they had either considered or

implemented to address cost pressures and other challenges, as shown in Figure 2D.

Figure 2D

Council strategies, considered or implemented, to address cost pressures and other challenges—survey results

Source: Victorian Auditor-General's Office.

While the main reasons councils pursued shared service initiatives were related to cost, and almost all councils cited some aspect of cost reduction or economies of scale as being part of their motivation to pursue shared services, issues of improving service quality and better community outcomes were almost as important as the financial imperatives. This aligns with the literature on shared services—that the best shared service initiatives focus not just on financial issues but also on service delivery outcomes. 56 54 51 50 44 51 45 46 41 32 0 20 40 60 80 100 120 Services review Joint procurement Organisational review Shared services Outsourcing Considered Implemented

Other important issues relate to the sharing of skills, expertise and best practice, and the enhancement of strategic partnerships with partners, as shown in Figure 2E.

Figure 2E

Reasons for councils undertaking shared services—survey results

Source: Victorian Auditor-General's Office.

The following comments by surveyed mayors reflect a recognition of the strategic importance, and the potential benefits, of working together:

x '…necessary for long-term sustainability.'

x 'Working together can make savings in service delivery costs.'

x 'We are a small rural city and we do not have the critical mass that provides viable access to services.'

Many comments revealed an enthusiasm for and a commitment to shared services: x '…keen to partner with organisations that are enthusiastic and committed.' x '…prepared to give a little for the good of the group.'

Commentary by surveyed mayors provided some further insights. A number of mayors indicated that they see potential in partnerships between dissimilar organisations— between larger and smaller, or urban and rural councils, and also between councils and organisations in other sectors.

0 20 40 60 80 100

To reduce costs Procurement savings, economies of scale To improve community outcomes To improve service quality Access to skills and expertise Exchange of knowledge and skills To build or enhance strategic partnerships To meet legislative requirements Approached by interested party To stimulate or support innovation Only way to deliver the service Other

Shared service activity at councils

2.3.3

_{Management of shared service initiatives}

Planning and project management

The extent of work underpinning initiatives prior to their implementation varies, with larger initiatives having had feasibility studies undertaken and business plans

developed prior to being implemented, compared to generally less formal and detailed work for smaller initiatives. The amount of work undertaken is generally appropriate for the size and financial investment.

Initiatives that we reviewed for this audit had a designated project manager for planning and implementation, including the coordination and dissemination of information to partners. Literature on shared services identifies having a designated project manager as an important factor in successful initiatives. Councils also indicated having dedicated resources for driving collaboration and shared service activities as being critical to their success.

Project management arrangements vary depending on the size and nature of the initiative. For instance, for a smaller initiative, it is appropriate that a council officer may take on this role, whereas a larger initiative may have a business manager. Initiatives led by LGV are generally managed either directly by LGV, a private contractor or MAV. Overall, audited councils reported that they found these arrangements to be effective.

Governance arrangements

There are a range of governance arrangements in place for shared service initiatives, and the majority of these are formal arrangements. In the survey, councils reported that the most common governance structures comprised of a board (35 per cent), lead council or agency (31 per cent) or a governing committee (17 per cent), while

10 per cent had no formal governance structure.

Governance arrangements of initiatives reviewed as part of this audit reflected the survey results, and were generally appropriate in relation to the scale and complexity of initiatives. They included complex multi-level structures overseen by boards, simpler committee structures and lead council arrangements.

The survey also revealed a range of management arrangements put in place for different initiatives. Management arrangements, alone or in combination, included: x _{a formal joint agreement—45 per cent}

x memorandum of understanding—20 per cent

x _{private company in which the council concerned and other partners are}

shareholders—15 per cent

x agreement with MAV—around 15 per cent

x _{incorporated associations—8 per cent} x _{tender process—3 per cent}

x agreement with Procurement Australia (a procurement company)—2 per cent

The range of management arrangements reflects the varied nature of initiatives, with some involving the formation of companies and others a simple memorandum of understanding or the more straightforward process of undertaking shared procurement.

2.3.4

_{Challenges of establishing and implementing shared}

services

When considering whether or not to enter into or continue shared service activity, councils weigh up the benefits and challenges. There are a number of common challenges in establishing and implementing shared services and reasons that initiatives stall that need to be overcome. The challenges surveyed councils identified as most significant are shown in Figure 2F.

Figure 2F

Challenges of planning and implementing initiatives—survey results

Source: Victorian Auditor-General's Office.

In the survey, councils reported that the most significant challenge of engaging in shared service activity is a perceived loss of autonomy and local control, and comments by mayors also reflected this finding. This finding is supported by the shared services literature.

42 37 33 26 25 16 15 13 11 10 9 8 6 4 3 3 2 1 1 0 5 10 15 20 25 30 35 40 45

Perceived risks to autonomy and local control Uncertainty about the benefits Resource commitments required Merging or standardising different systems and processes Establishing effective governance Managing cultural change or resistance Effective monitoring and measurement of impact Resistance by staff or unions to change Insufficient political will Insufficient leadership/support from senior management Movement of jobs outside the council area Legislative or legal constraints Job losses Cooperation between councils Insufficient political leadership Equalising pay and conditions of staff from different employers Timing Cost shunting to other parts of the council No business case